1ST QUARTER 2017
- MARKET COMMENTARY
- CAPITAL MARKETS OVERVIEW
- SECTOR OVERVIEW
- FIDUCIARY CORNER
- PLANNING CONCEPTS
- INSIDE THE MARKETS
- OPA NEWS
The Trump Bump Does The Zombie Walk…
After going into launch-sequence after last November’s election, the domestic capital market’s ascent began to flat-line a bit during the last half of 2017’s first quarter, closing with the “quietest” quarter in 50 years. When measured by the average daily movements of the indices during the period, the Dow and S&P 500 were the least volatile that they’ve been since 1965 and 1967 respectively...the prehistoric era of The Monkees and The Doors according to Kopin Tan at The Wall Street Journal.
Investors had very little conviction, one way or the other, as the quarter progressed, focusing instead on what might actually come out of, or happen within, the rollicking first “100 Days” of the new administration. It appears that the euphoria of campaign promises came up against the cold hard reality of Washington politics, and was coupled with recognition that the “Swamp” might not be able to be “drained” as quickly, and easily, as had been suggested.
Regardless, the markets very measured, zombie-like moves reflected the perplexed public’s inability to ascertain what would ultimately develop within the relatively important spheres of tax, trade, and health care policy. In a nod to “the more things change, the more they stay the same”, our nation’s capital continued to refine the high art form of speaking out of both side of ones mouth with a dizzying array of policy and personnel, reversals and modifications. All of which was bewildering to the supposed rational mind of a market that wanted desperately to proactively project the future implications of potential changes, but instead found itself attempting to decipher the importance of ongoing 140 character commentaries.
One of the investment take-aways from this constrained quarter’s activity was that:
“The muted moves suggest there is “pent-up energy” in investors that could shake up the markets once there’s greater clarity on policy and earnings…” ~ G. Benerji, WSJ 03/31/17
All of which leads us back to our focus on equity valuation comparisons as a means of evaluating risk-adjusted returns going forward. And although there’s no doubt that some of the proposed regulatory and tax reforms could be supportive of the business world’s prospects, we still believe that relative price analysis, rather than blindly dumping assets into indiscriminate purchases of index funds and ETFs, can better discern future value for prudent investors aiming to mitigate volatility. We’ve never been fans of mass migrations in and out of the capital markets, but instead find valuation analysis to be a useful tool to constrain extreme enthusiasm - in either direction.
With the S&P 500 trading at 2.1 times sales, above the high prior to the Great Recession and closing in on the pre-dot.com peak of 2.3, along with the Nasdaq Composite already hitting more new highs this year than it has since 1999, there’s at least the suggestion that we’re closer to a top than a bottom. Combined with the fact that our stock market is now 207% of our GDP, more than the 181% in 2007 and 202% in 2000, one could muster an argument that holding back at least some of the chips at this point would enable one to better take advantage of any resurgence in future market volatility.
Again, we’re not trying to yell fire in a crowded theater and have everyone run to the exits, but instead would be supportive of slightly higher cash positions and gradual allocations into the equity markets to capture the full benefit of dollar cost averaging, while still being able to be more nimble should opportunities arise to take advantage of temporarily lower prices.
“Trillions from global central banks have already lifted stocks and bonds to giddy heights but haven’t yet animated the economy to quite the same extent. Anyone waiting in 2017 for euphoria to show up in loud Lamborghinis or trading-floor debaucheries just may find themselves looking, one day, into the harsh fluorescent lights that come on after last call.” ~ K. Tan, WSJ 4/8/17
For a variety of reasons, we’ve always been advocates of not being the last one out of any bar, as it can often cloud the decision making process – making the “correct” answers to the following “test” more challenging than need be:
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower prices? These questions, of course, answer themselves.
“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stocks rise, and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.” ~ Warren Buffett
Our focus on portfolio income production helps provide clients with the cash flow, unencumbered by market pricing levels, to continue as net “savers” going forward and take advantage of market fluctuations when they occur - a strategy we feel maintains its relevance in times like these.
Into The New Year…
Last year's momentum carried over into the first quarter of 2017 as the S&P 500 returned 6.1% without any meaningful pullbacks. The sectors leading the charge included technology, consumer staples, consumer discretionary, industrials and materials. Financials and energy returns cooled after substantial returns earned in late 2016. The same could be said for small cap value stocks as the asset class mean-reverted losing 10 basis points in the quarter. In the face of Brexit implementation and several upcoming elections in Europe the international developed market benchmark "climbed a wall of worry" returning a notable +7.4% for the quarter. Outpacing that were Emerging Markets. After years of underperformance the asset class has shown some signs of momentum, jumping 11.5% in the first quarter of 2017.
After adjusting to a reversal in interest rate policy in late 2016, most fixed income securities groups made up ground in Q1 of 2017. Despite the Fed delivering a 3rd interest rate hike in March, longer term rates on 10 and 30-year Treasuries fell to 2.40% and 3.02% respectively, helping the Barclays Aggregate bond index rise .80%. Municipal and corporate bonds rallied as well, up 1.8% and 1.2% for the quarter. Benefiting from both the downward move in long term rates and an uptick in economic optimism, high yield bonds rose 2.7% for the quarter.
As the current economic expansion continues, ranking as the 2nd longest in modern history, one can't help but wonder when the next downturn will come. Easing those concerns are trends like improving global breadth among stocks, a sign of broadening and healthier growth. Another positive sign, any subtle drop in equities has been supported with strong incoming demand as new buyers are quick to step in. Housing demand remains strong, outstripping current inventory according to the National Association of Realtors. The research firm Ned Davis's recession probability model pegs the chances for a US recession currently at 0. Liz Sonders of Charles Schwab recently referenced the forward looking gauge called the "The Leading Economic Indicator" (or LEI) and its recent move higher. "In fact, for the first time in this recovery, the LEI finally took out its pre-recession high... a sign that recession risk remains low." As comforting as that may be, economic forecasts are never a certainty.
We remain optimistic about the long term health of the stock market, while at the same time recognize unforeseen events can quickly change sentiment and the direction of markets. In fact as of this writing geopolitical risks have risen with recent developments in Syria, North Korea and upcoming elections In Europe.
This past quarter saw money flow into sectors that had lower relative valuations, causing a turnaround from the last quarter of 2016. The four top performing sectors were Technology, Consumer Discretionary, Healthcare, and Utilities.
Technology has been the best performing sector this past quarter, returning 10.7%. The sector has seen increased money flows due to net positive revisions to EPS estimated from Wall Street sell-side analysts, reasonable forward P/E’s with strong forward long-term growth rates and low forward P/E to growth ratios. A tax overhaul and possible repatriation of foreign dollars should also help this sector going forward.
While Financials have the best return since November 8th of last year at 19.7%, their year-to-date number has been disappointing at 2.4%. In last quarter’s newsletter we opined if Financials had gone too far too quick. Looks like they did, but Financials have largely underperformed the broad market going all the way back to the early 2000’s and so it’s going to take some time to correct that divergence. A rising interest rate environment and the Trump administration’s goal of deregulation and a tax reform should help the Financials going forward.
Healthcare was the third best sector this past quarter, rising 8.3%. Healthcare has the lowest forward P/E and its relative valuation has helped to provide modest positive money flows into the sector. The proposed replacement for the ACA does not seem too negative for the space, as big insurers should be okay and there’s not much pressure on the big drug makers. The lack of replacement approval will probably put a limit on performance, until some of the uncertainty subsides.
Economic growth could accelerate in 2017 to a roughly 2.5% pace. Lower taxes could boost consumer and investment spending going into 2018 and stronger defense spending could push government spending higher. However, political uncertainty along with a worsening trade deficit should hold any expansion to not much more than 3.0%. So where is there still opportunity?
While stocks are now generally more expensive than average in a rising rate environment, cyclical sectors, such as financials and technology should be able to outpace more defensive sectors such as consumer staples, utilities and REITs.
Going back to 1950, this was the 25th time the S&P 500 gained 5% or more during the first quarter. The good news for the bulls is the returns after a big first quarter have been broadly stronger across the board. While markets never move in a straight line, incredibly, the full year has been higher 23 out of 24 times, with only 2011 lower. On a total return basis (including dividends), all 24 years have been higher. So, while sector leaderships may change, it looks like the odds are in favor of a bull market through the rest of the year.
As always, Old Port Advisors will look for investment opportunities for our clients that have favorable valuations, strong fundamentals and a proven track record in whatever sector they are in.
As expected, the Trump administration has delayed the implementation for the Department of Labor’s “Fiduciary Rule” by at least 60 days. The move is designed to allow the new administration more time to review on the impact of the rule on the industry. In reality, the delay is the result of a massive and continued lobbying campaign by some parts of the investment industry (brokers, insurance companies) to have the rule removed altogether, and a new administration that is viewed as more friendly to the issue.
As mentioned previously in this space, the rule is designed to protect consumers, specifically with regard to IRA rollovers, and central to the rule is the concept of working in the best interest of the client. We’ll try to continue to analyze different facets of the rule, and their impact on consumers. For this article, we’ll look at the players and how they are impacted.
The retirement account investment advisory landscape basically breaks down into the following groupings:
- Registered Investment Advisors (RIA): Old Port Advisors is an RIA. RIA’s are held to a fiduciary standard and are regulated by the fiduciary principle of placing the client’s interests ahead of everything else. This is the highest level of fiduciary service. These firms provide fee-based advice and are minimally impacted by the fiduciary rule.
Broker-dealers: Traditionally thought of as “stock brokers”, advisors for these firms are only legally required to do what is “reasonable” for their clients. They are often a mixture of commission and fee-based advice and are significantly impacted by the rule which requires them to document proof that what they are proposing for a client is better than the client’s current investments. Prior to the rule being delayed, several brokerage firms actually changed their structure make it easier to comply with the requirements. They are not fiduciaries but they would be required to sign a Best Interest Contract Exemption (BIC) that indicates they will do what is in the client’s best interest even though they are not a fiduciary.
Insurance brokers/annuity sales: This group is hardest hit as annuity sales tend to target IRA rollover accounts. Fees in the annuity and insurance world are often hard to understand for the consumer, and very expensive. Providing supporting documentation that an annuity is a better suited investment and in the client’s best interest is very difficult. It is not a coincidence that annuities often pay the highest commissions out of anything the broker sells. It is also not a coincidence that when the rule came out, the first lawsuits against the government were submitted by annuity industry trade associations. All were thrown out for lacking merit.
The DOL’s Fiduciary Rule is a good thing for customers and clients of investment advisors. It is requiring that the rest of the industry treat accounts like RIA’s always have – with prudent investing and fiduciary oversight that is in the best interest of the client. Old Port Advisors IS a fiduciary and we will continue to operate in our client’s best interests, rule or no rule.
When to Retire or…
Most of us only start focusing on when we can retire after years of working. We decide on an age, estimate expenses, think about what we will do and where we’ll do it, and during the planning process, we come up with a general idea if we can reach that retirement goal or not. For most the planning works, for many it may not go as anticipated. We may find we need to increase savings, decrease expenses, increase risk, or just work a few years longer. Most people do not think about what they would do if they had to stop working before they planned to.
What If One is Forced to Retire…
I recently came across some interesting and possibly alarming statistics put out by the Employee Benefit Research Institute (EBRI). The EBRI conducts the “Retirement Confidence Survey” annually providing data that is widely used to create sound employee benefit programs and public policies. The 2015 survey found that roughly half of all U.S. workers retired earlier than planned for either positive or, unfortunately, negative reasons. Approximately 1 out of 2 workers were forced to retire earlier than they planned because of unexpected situations.
- 60% encountered health problems or disability
- 27% went through changes at their company (downsizing or closing)
- 22% stated other work related reasons (examples: personal conflicts, differences in philosophies)
- 22% needed to care for a spouse or family member
- 10% had outdated skills
Sixty-seven percent of the respondents planned on retiring at age 65 or later but only 23% of the 67% did so for the reasons above or because they could afford to retire or they wanted a change in their lifestyles.
Things to do to be prepared…
First and foremost, discuss a retirement financial plan with your advisor. People often prepare for the loss of a spouse and for insurance needs but rarely does one think about preparing of an early forced retirement.
There are things people can do to better protect themselves from a forced early retirement:
- Start evaluating your health now for retirement, and begin maintaining a healthier lifestyle.
- If caring for aging parents may be in your future, you may want to evaluate long term care insurance for them as part of your own planning.
- Evaluate your own career. Is your position susceptible to layoffs and downsizing?
- Keep up to date on skills. Possibly look into going back to school to keep up with new and current skill sets in the marketplace.
Contact us at Old Port Advisors to help you establish your customized retirement financial plan.
Divorce: Focus on the Details…
Divorce can be an overwhelming experience, abruptly changing nearly every aspect of daily routine. The emotional upheaval can complicate reaching a fair resolution and entail long, contentious negotiations. The sight of final papers can be a huge relief, but, before signing them, take time to ensure your interests are protected and your estate plan reflects your new marital status. Do not rush to sign. Your signature is a significant bargaining chip, so use it.
Many divorce settlements entail transfer of retirement assets to the non-employee spouse through a separate order called a Qualified Domestic Relations Order, or QDRO. Drawing up a QDRO can be a complicated and exacting process and it is best left to a specialist. The QDRO is not legally binding until the judge has signed it, so the optimum approach is have it prepared and filed with the court at the same time as the final divorce agreement. The goal is to have the judge sign the divorce decree and the QDRO at the same time so it can be served on the custodian of the pension (usually a 401(k) plan) immediately. The plan administrator can't do anything with it until it is signed by the judge.
As complicated as the QDRO may be, this is not something that should be delayed. Even if your settlement agreement and final decree state that a pension account is to be divided between the parties, most pension administrators will not actually split the pension without a QDRO. The QDRO has all the details the administrator needs to move assets: the exact name of the plan, the Participant (also sometimes referred to as the Member or employee spouse), the Alternate Payee (also sometimes referred to as the Former Spouse or non-employee spouse), and the exact amount or percentage to be awarded, or a formula to be used to calculate the award. You need the judgment of divorce to get the QDRO, but by itself, the divorce decree will not get you your share of the assets.
There are many of reasons not to delay applying for the QDRO. The Participant spouse may decide to retire or remarry before the QDRO becomes part of his employee file. The non-employee spouse would have to go back to court in an expensive fight to enforce a retroactive pension claim. The Participant spouse could die before retirement and the death benefit could name some other than the non-employee spouse. The Participant spouse could: take a loan from the account; move, making filing the QDRO more difficult; withdraw funds or roll the account over to a new financial firm not named in the QDRO. There are many things that could go wrong.
It may be appealing to take a break at the end of a divorce, and put off the task of obtaining a QDRO. But the potential of costly litigation with your former spouse outweighs any benefit. Take the time to finalize these details, get resolution and move forward in your post-divorce life with one less thing to worry about.
Fred Williams - Once again this year Mr. Williams attended the Morningstar Ibbotson Conference in late February. Ibbotson’s analyst’s symposium continues the tradition of bringing academic theory to industry practice, with thought leadership on asset allocation, investment research, economic analysis and behavioral finance.
Fred was also invited to attend Barron’s Top Independent Advisors Summit in late March, which included conversations and seminars surrounding the fiduciary industry, and featured a presentation by Kareem Abdul-Jabbar focusing on his approach to philanthropy through his SkyHook Foundation.
Terry Davies – Has recently passed the training and testing process to become a Certified Divorce Financial Analyst with the IDFA (www.institutedfa.com). Founded in 1993, IDFA provides specialized training to accounting, financial, and legal professionals in the field of pre-divorce financial planning.
Save The Dates:
We’re entering the time of year when a variety of non-profit organizations begin their annual fundraising efforts so they can continue to enhance the fabric of our community. Although by no means complete, the events below are but a sampling of the organizations that our firm, employees, colleagues and clients are involved with, should you want to consider supporting their missions.
Walk MS – The annual spring walk to benefit the MS society will take place on April 22nd at The Portland Expo starting at 9:00 AM. Participation provides help for today and hope for tomorrow through education, support, advocacy, and research funded by the National Multiple Sclerosis Society through its Greater New England Chapter. Details can be found at www.walkmam.nationalmssociety.org.
Bids for Kids - Benefitting Big Brothers Big Sisters of Southern Maine, will be held on Friday, April 28th at the Holiday Inn by the Bay with light dinner fare, and complimentary Shipyard beer. In addition, the positive effects of mentoring will be celebrated by recognizing the 2016 Matches of The Year. Details can be found at www.SoMeBigs.org.
24th Annual Child’s Play Golf Benefit – The Dream Factory of Maine is celebrating its 30th anniversary of granting dreams to the children of Maine and is holding its Child’s Play tournament Friday June 2nd at Sable Oaks and starting at noon. The Dream Factory grants dreams for critically and chronically ill children nationwide, is based in Louisville, and has 2 chapters in Maine. Additional information can be found at www.dreamfactoryincmep.org.
Fur Ball – The Animal Refuge League of Greater Portland is throwing its annual benefit party at the remodeled Aura in downtown Portland (121 Center Street). A night of food, drinks, and music – all to benefit their life-saving programs. Tickets and additional info can be found at http://www.arlgp.org/ .
Fore The Kids Golf Classic – Big Brothers Big Sisters of Southern Maine’s annual fundraiser will be held June 19th at The Woodlands Club. Additional information on this popular two-ball/best-ball event can be found at www.SoMeBigs.org.
Also, please feel free to visit our new website (www.oldportadvisors.com) as we continue our rebranding efforts and build out more of our online capabilities.
Old Port Advisors was founded more than 20 years ago as Investment Management & Consulting Group (IMCG), with a vision to create a boutique independent investment management firm centered on the best interests of our clients. Our principles were simple and still ground us today: a values-driven, personalized, collaborative, and strategic approach to investing, wealth management, and fiduciary consulting. We changed our name to embark on the next 20 years, but our leadership and our calling remain. We’re excited to build on our past experience and success to deliver on our promise of building a secure future for our clients.